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International Monetary Fund May 11 , 2017

International Monetary Fund May 11 , 2017. The Global Economy: Hopes and Fears Maurice Obstfeld Economic Counsellor. Gaining momentum?. Global recovery gaining traction but medium-term outlook remains subdued Long-awaited cyclical rebound in activity seems underway

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International Monetary Fund May 11 , 2017

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  1. International Monetary Fund May 11, 2017 The Global Economy: Hopes and Fears Maurice Obstfeld Economic Counsellor

  2. Gaining momentum? Global recovery gaining traction but medium-term outlook remains subdued • Long-awaited cyclical rebound in activity seems underway • Sentiment has been strong, as have underlying real indicators (e.g., trade, and commodity prices) • Medium-term outlook subdued for AEs and commodity exporters Risks more two sided than before but still skewed to the downside • U.S. tax reform could be growth-friendly; stronger European growth momentum? • But: Risk of higher U.S. deficit, disruption of trade relationships • Tightening financial conditions might trigger spillovers to EMs • Geopolitical and electoral uncertainty could take a toll on market sentiment • Risk of spillovers from an abrupt slowdown in China over the medium term Comprehensive, consistent, well-communicated policy mixes are vital • Policy challenge: Secure the recovery, avoid downside risk scenarios, improve inclusiveness • Continue structural and fiscal reform, balance sheet repair, improvements in the financial stability framework • Time to renew multilateral efforts to tackle common challenges 1

  3. An update on the world economy

  4. The global economy seems to be gathering strength Global manufacturing PMI (index; >50 = expansion; sa) Consumer confidence (2010=100) Source: IMF, Global Data Source. 2

  5. Uptick in trade and higher commodity prices World merchandise trade (year-on-year percent change) Commodity price indices (Jan. 1, 2010 = 100) Sources: IMF, World Economic Outlook; and CPB Netherlands Bureau for Economic Policy Analysis, World Trade Monitor. 1/ Sum of world exports and imports, measured in U.S. dollars. 2/ APSP (Average Petroleum Spot Price): average of U.K. Brent, Dubai, and West Texas Intermediate, equally weighted. 3

  6. Risks to prices have receded • Inflation rates in advanced and emerging economies 1/ (percent; share of the countries in each sample) Core CPI inflation Headline CPI inflation PPI inflation Advanced Emerging Sources: IMF, Global Data Source; and IMF staff calculations. 1/ A total of up to 48 countries are included in the analysis, 32 advanced and 16 emerging economies. 4

  7. Low market volatility and EM sovereign spreads Equity and bond volatility (Jan 2013 = 100) EM sovereign spreads (bps) Selected Euro area sovereign spreads against Germany (bps; 10yr) Brexit vote U.S. election Brexit vote U.S. election Sources: Bloomberg, L.P.; and IMF staff calculations. 5

  8. WEO projections

  9. Growth projections: Advanced economies (percent change from a year earlier) Sources: IMF, World Economic Outlook April 2017; and IMF, World Economic Outlook January 2017 Update. 6

  10. Expected U.S. GDP growth Output gap and unemployment rate (percent) Distribution of real GDP Consensus Forecasts (x-axis: GDP growth rate; y-axis: share of forecasters in the sample) Sources: Haver Analytics; IMF, World Economic Outlook; Information Notice System; Consensus Economics; and IMF staff calculations.

  11. Growth projections: Emerging markets and LIDCs (percent change from a year earlier) Sources: IMF, World Economic Outlook April 2017; and IMF, World Economic Outlook January 2017 Update. 8

  12. Downside risks: Further U.S. dollar appreciation

  13. Crises in EMs and U.S. dollar appreciation U.S. REER and crises in emerging markets 1/ (REER index, 1980=100; number of crises) 95Q3-02Q1 Apprec. 12% Sources: Haver Analytics; IMF International Financial Statistics;Federal Reserve Board of Governors; and IMF staff calculations. 1/ The number of crises in EMs per year is based on Laeven and Valencia (2013)’s methodology. 2016-17 data are not available. 9

  14. Global imbalances could expand Current account balance (percent of world GDP) Source: IMF staff estimates. Note: Oil exporters = Algeria, Angola, Azerbaijan, Bahrain, Bolivia, Brunei Darussalam, Chad, Republic of Congo, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kazakhstan, Kuwait, Libya, Nigeria, Norway, Oman, Qatar, Russia, Saudi Arabia, South Sudan, Timor-Leste, Trinidad and Tobago, Turkmenistan, United Arab Emirates, Venezuela, Yemen; Other Asia = Hong Kong SAR, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan Province of China, Thailand. European economies (excluding Germany and Norway) are sorted into surplus or deficit each year by the signs (positive or negative, respectively) of their current account balances. 10

  15. EMDEs, capital flows, and convergence

  16. “Uphill flow” has receded – but for how long? EMDEs: Net capital flow composition and reserve accumulation (percent of World GDP) Current account balance by country groups 1/ (percent of World GDP) Discrepancy E 2/ Sources: Boz, Cubeddu, and Obstfeld (2017); IMF Financial Flows Analytics; IMF World Economic Outlook; and IMF staff calculations. 1/ The chart is based on an unbalanced panel comprising 129 in 1980 and 140 countries in 1990. 2016 data are WEO estimates. 2/ 2016 data reflect a sub-sample of 62 EMDEs with available quarterly observations up to 2016Q3. 11

  17. The role of saving and investment Change from 1998-2008 (pre-crisis) Change from 2008-2016 (post-crisis) Percent of world GDP AEs EMDEs AEs EMDEs Sources: Boz, Cubeddu, and Obstfeld (2017); and IMF World Economic Outlook.Note: 2016 data are projections from the IMF World Economic Outlook. Change in saving includes a small discrepancy so as to ensure that the current account matches the difference between saving and investment. 12

  18. Medium term considerations: Productivity growth

  19. Productivity growth slowdown: Trends TFP growth in ICT/non-ICT-intensive sectors in advanced economies 1/ (percent; 6-year moving average) Trend TFP growth (percent; weighted using purchasing power parity GDP) 2007 Sources: “Gone with the Headwinds: Global Productivity,” SDN/17/04; Penn World Table 9.0; IMF, World Economic Outlook; Furceri, Çelik, and Schnucker (2016); Dabla-Norris and others (2015); EU KLEMS and WORLD KLEMS data; and IMF staff calculations. 1/ ICT = information and communications technologies, TFP = total factor productivity. Top and bottom 5th percentiles of the distribution across country-industries are excluded as outlier treatment. 13

  20. Productivity growth slowdown: Headwinds Contribution of human capital accumulation to annual labor productivity growth (percent; simple avg. for both groups) AEs: Observed TFP for low and high rollover risk firms 1/ (index; 2005=100) Sources: “Gone with the Headwinds: Global Productivity,” SDN/17/04; Duval, Hong, and Timmer (forthcoming); Furceri, Çelik, and Schnucker (2016); Dabla-Norris and others (2015); EU KLEMS and WORLD KLEMS data; and IMF staff calculations. 1/ High/low rollover risk correspond to the 75th and 25th percentiles of the cross-country cross-firm distribution of rollover risk in the sample. Rollover risk is measured as debt maturing within a year in 2007, as a percent of total sales. 14

  21. Growth, openness, and distribution

  22. Why is labor receiving a declining share of GDP? Contributions to aggregate labor share changes, 1993-2014 (deviation from regression constant) 1/ Evolution of the labor share of income, by skill – Advanced economies (percent) Sources: World Input-Output Database; CEIC database; OECD database; IMF, World Economic Outlook; and IMF staff calculations. 1/ Derived contributions are scaled to show total changes over 25 years. 15

  23. Growth has done more to lift lower incomes in EMs Aggregate average per capita income by income group (2011 PPP; in thousands of U.S. dollars; aggregation based on population weights) Advanced countries 1/ Emerging countries 1/ 60% 70% 67% 4% 3% -3% Sources: World Panel Income Distribution Dataset (Lakner-Milanovic-WPID); and IMF staff calculations. 1/ Based on a sample of 14 advanced countries and 16 emerging markets, respectively. 16

  24. Policy conclusions

  25. Policy recommendations Comprehensive, consistent, well-communicated policy mixes are vital to sustain the momentum • With diverse cyclical positions, policy priorities differ across countries. There is a general need for fiscal policy to support inclusive growth and ensure fiscal sustainability, while adequately managing risks: • AEs with output gaps: Accommodative monetary and fiscal policy as needed and feasible • AEs without output gaps: Data-dependent monetary normalization; fiscal policy should be growth-friendly, and switch to consolidation where necessary; where appropriate focus on reducing CA imbalances • EMDEs: No one size fits all (see WEO details) Structural reforms for all—well-sequenced, and paired with supportive macro policies as needed • Productive infrastructure • Investment in education • Fiscal reforms that encourage labor-market participation (especially for women), investment, R&D • Policies that promote efficient use of human resources can raise inclusion while also helping productivity Reinvigorate multilateral efforts • Refocus trade discussion toward net integration benefits and policies to mitigate side effects • Address cooperatively other public-good problems 17

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